Bridge Span 14-6: Extend, then Reform

Sooner or later the time comes when you just have to get the job done. Wrapping up the first quarter of the year and still Congress has not moved on the “tax extenders package.” It is well past time to do so and end another government stumbling block for taxpayers.

“Tax extenders” refer to the now 55 tax breaks that will expire at the end of the year, which are usually packaged together into one piece of legislation. These are changes to the tax code that for whatever reason have not been made permanent and hence expire periodically, often annually. Some of them are far research, such as the research and experimentation tax credit, or the tax deduction allowed to those who pay state sales or income taxes. Others are much narrower, such as tax credits for certain industries. But they all share the fact that they keep expiring year after year.

In theory, the purpose of tax credits is to encourage additional activity in a particular area, above and beyond what would have occurred without the tax credit. In other cases, the deductions reduce taxable income to adjust for the impact of the federal tax code on certain individuals.

Few would argue that the ongoing cycle of tax adjustments, which are extended and then allowed to expire or be re-implemented retroactively, is a good way to run a tax system. Tax breaks designed to help “level a playing field,” or to encourage activity, do neither when the break is uncertain or routinely reinstated after it has expired. And a tax code that is written to favor some over others is far from optimal in the first place. So we end up with a suboptimal tax code that does not even serve its purpose.

This annual “tax extender” routine needs to end. Such breaks should either be made part of the permanent code or dropped. But to do so after companies and individuals have already planned on those extenders only serves to pull the financial rug out from under those who were trying to do the right thing by planning well to maximize business success and the jobs of those they employ. Despite being a year in length, the tax extender process repeats each year, often with extenders lapsing and then being made retroactive.  In other words, Congress’s pattern has trained taxpayers in what to expect.

The best solution is to pass the tax extenders package and then finally turn attention to the business of real tax reform seeking a simple, transparent, neutral, territorial and globally competitive code. Because of its tremendous potential to stimulate real long-term economic growth, tax reform should be a top priority of policymakers.

Bartlett D. Cleland, is managing principal of Madery Bridge and IPI Resident Scholar, Tax and Innovation Policy.
March 31st, 2014 | Category: Tax | Comments are closed

Bridge Span 14-3: Tech Champions! Constitution Warriors?

Tech Champions!  Constitution Warriors?: Will “Real” Conservatives Usher in a Radical Expansion of Government Power?

Tomorrow the House Judiciary Committee will hold the hearing “Exploring Alternative Solutions on the Internet Sales Tax Issue.” Taking some time to explore the Constitutional challenges of current proposals which mandate the collection of taxes by businesses across state lines and an examining the potential for the radical expansion of government would be a good place to focus.

Reportedly, Congressman Chaffetz is taking a harder look at the current Marketplace Fairness Act and working on language for new online sales tax legislation.  Politico has reported that his “new measure would give more authority to states to decide how they implement sales tax collection from out-of-state online retailers…”

What would drive the Congressman to be this deeply involved in this issue?  No doubt it is a laudable desire to make sure that government is not in growth mode by ignoring rights reserved to the states.  “I believe it’s a states’ rights issue. I want to give them flexibility,” he said. “We haven’t hammered out actually what it would be, but there is a concern about small sellers and will they have to go through 34 different audits. There’s got to be a way to craft it so it is more reasonable and workable.”  Unfortunately for the Congressman, there is no reasonable and workable scheme along these lines, particularly for a true conservative or constitutionalist, because neither the U.S. Constitution, nor the Bill of Rights, gave the states the right to trample their neighbors.

The heart of the problem is seeing the federal government act, the states being involved and reflexively concluding a state’s rights issue is in play when in fact it is not.  In this case, the law that prevents states from taxing and auditing citizens of other states was an intentional limitation placed on the power of the states, a check on expansionist government.

There is little argument that the federal government has often been doing things that should never have been crammed into the Commerce Clause.  But by no means is Commerce Clause is completely invalid.  In fact, the very action of looting across state lines, taxing without representation, led to the need for something better than the Articles of Confederation.  As a result the U.S. Constitution was written to include the Commerce Clause exactly as a means to stop the overly aggressive states from interfering with interstate commerce, but did imbue states with the power to protect their citizens from other governments.

Since then, states have never had the power to tax out-of-state residents. The states have been specifically denied that power for good reason.  What would happen if states had the power to tax out of jurisdiction residents as is being proposed?

The proposed legislation does more than just increase collected taxes on consumers, and even more than placing a significant compliance burden on online business, by its very nature it greatly expands government.  It would mean the end of physical presence (the physical presence test is the test to determine the treatment of a person for taxation purposes and may rely on having a place of business in the jurisdiction) as a limitation on the ability to levy tax on a person, organization or corporation.  In other words, such action leads to the end of any limitation on government power.

The issue of physical presence is perhaps the most important issue of the Internet age–does the power of government now spread beyond the physical borders of a government entity, such as a tax authority, or is the power of government now as limitless as the Internet so that any government anywhere can bring any person under its reach at any time?  The question is fundamental.  Under this scheme there is simply no remuneration against an overzealous taxing authority, or an overzealous authority pursuing any issue.  Those who believe that government is a creation of the people, and hence should be limited must say yes to the requirement of a physical presence.

All other questions and “fixes” are irrelevant so long as this bedrock of the Constitution and fundamental tenant of conservatism is at risk.  Thresholds for audits, software costs and ease of compliance, third party liability for reliance on software, burdens on small sellers and Main Street businesses, and a statute of limitations on state audits of remote sellers are all irrelevant if  constitutional protections are forfeit.  Once government is allowed to grow past the limitations of physical presence it will never again be limited.

Arguments over appropriate tax rates, and whether taxes are applied in the first place, are legitimate and worthwhile.  A debate about whether constitutional limitations on the breadth of government, about whether an individual should be subject to governmental authority by those with whom they have no representation must always result in a firm “never!”

Are we going to have limited government in the 21st Century?  What does the concept of limited government mean in an age where government is easy via the Internet and technology?

To their credit, Mr. Chaffetz and certainly Mr. Goodlatte have proven time and again that they are champions of the technology industry.  Now they face a daunting challenge working within the Constitution and not creating a painfully effective vehicle for the radical growth of government power.

March 12th, 2014 | Category: Communications policy, Tax, Technology | One comment - (Comments are closed)

Bridge Span 14-5: Living in an Aereo World

by Stevan Mitchell

On April 22, the Supreme Court will confront two sub-optimal scenarios when it hears ABC Inc. v Aereo – a case with potentially resounding impact on the relationship between broadcast television and the Internet.  Affirming the appeals court decision would unjustly reward cynical lawyering and technological inefficiency, and potentially lead to reductions in premium “over the air” content.  But by taking the other path, the Court could solidify pivotal distinctions in Internet law based on increasingly inapt analogies, enshrining rigidity that could lead to greater uncertainty amidst technological advancements.

Rewarding inefficiency

Aereo is an online service that retransmits freely-available local broadcast signals via the Internet to subscribers in their local broadcast areas without paying retransmission fees that would be paid by cable or satellite providers.  Aereo does this by exploiting an apparent loophole, created in the Second Circuit’s 2008 Cablevision decision, which sets out conditions under which customers can initiate privately streamed transmissions without implicating performance rights.

Aereo rents each of its subscribers a separate, dime-sized television antenna.  Thousands of these devices are housed on boards inside local Aereo antenna farms.  Aereo also rents to subscribers a discrete portion of its storage media to serve as personal networked DVRs, storing programs recorded through these antenna for immediate viewing or viewing at a later date.Aereo boasts that even if hundreds of thousands of subscribers chose to view the same program at the same time, they would never share an antenna, a data stream, or a recorded file.  By holding staunchly to design features suggested by the Cablevision ruling, and enabling subscribers to view and record only in their local broadcast areas, the company has avoided paying retransmission fees to broadcasters.  It claims to merely be facilitating connections that consumers would be able to receive but for the absence of a television receiver.

The technological infrastructure that has been constructed by Aereo lawyers and engineers to exploit a potential legal loophole has been identified by courts and commentators as a modern Rube Goldberg creation.  The design has been called “ridiculously inefficient and monstrously unscalable” even by those who might prefer to see copyright law operate differently in this space.[1]  At a time when competitors are negotiating arrangements to reduce redundancy, inefficiency, system drag and unnecessary bandwidth usage through novel engineering solutions, Aereo has built its business on design inefficiencies to exploit a legal loophole.

Aereo is also subscribing to the ultimate “tech mandate.”  It is ironic that as a nominal representative of a tech industry quick to cry foul over regulatory requirements that dictate engineering design, the company would so wholly embrace particular design specifications mandated by litigators given the opportunity to score a freebie.

The design is the equivalent of having thousands of people using thousands of toothbrushes to swab the deck of a ship.  But while is ship is better off for having received the cleaning, that is not so clearly the case with respect to the TV broadcast environment, which, if Aereo is affirmed, could quickly degrade to reduce the availability of free over-the-air content to a larger consuming public.  (Fox and CBS have said they could abandon their free-over-the-air broadcast signals and become cable networks if Aereo’s business model is approved.)  Instead of being merely amused by its inefficiencies, we should be legitimately concerned about Aereo cannibalizing the very content that makes its services available.

Enshrining inapt analogies

While Aereo’s design features survived scrutiny by the Second Circuit, a Federal District Court in Utah, finding likely copyright violations, enjoined Aereo’s operations in Utah and Colorado and placed other actions on hold pending further guidance from the Supreme Court.With a clear gulf forming over Aereo’s legality, perhaps the Court can do what it needs to resolve the immediate skirmish by distinguishing Cablevision instead of reaffirming and further extending its unpredictable implications.

But there are unlikely to be clear winners here.We are seeing several critical analogies that lawmakers have relied on to guide statutory construction increasingly being strained by technological advances in communications technologies.Construing statutory language in ways that predictably align with the policies we might agree are beneficial is becoming increasingly prone to varied results.  That Aereocould be a close call shows this to be true.

Among the analogies that are increasingly strained, and with potential to foment continuing uncertainty and litigation, are those prompting bright-line distinctions in law between public and private performances and transmissions (as well as distinctions now enshrined between streams and downloads – but that’s a topic for another day). Cablevision’s private streams are one inapt analogy, as packet-switched communications are not private, they’re ubiquitous, but only most readily decoded by the intended recipient.

In Aereo, weighty consequences attach to the interpretation of the  performance analogy and the transmission analogy, which at their core are only metaphors for the wash of packets traversing wires and air.  But how should we go about discerning individual performances or even discrete transmissions in an “always on” environment, in which millions of devices are capturing and (for want of a better term) transmitting in near-real time billions of artifacts from human interactions?  And are we well-served by perpetuating a “transmission” analogy under conditions where bit flows more resemble dialogues?

One result could be a challenge from the Court for the legislature to reexamine the aptness of the public performance analogy to Internet transmissions, informed by the realm of the possible in the Internet Age.  Recognizing the stakes, it is likely that the Court will proceed gingerly here.  But with leading institutional authorities each having pledged to undertake copyright review at varying depths, a worthy undertaking might be a deep analysis, informed by technologists, over the aptness of analogies that for years have guided lawmakers’ efforts.

There is no question that an appropriate balance must be struck to preserve incentives for creators.  The easier it becomes to replicate, transmit, record and re-experience a work the more this proposition holds true.  Our overarching policy preferences may be best served, and the right balances most cleanly and predictably struck, however, by analogies that more closely resemble today’s bit stream communications and how they are used.  The alternative is to continue to retrofit and stretch yesterday’s physical world analogies.

Stevan Mitchell is a policy counsel, government relations strategist and advocate, working to advance policies beneficial to technology and content interests in areas including intellectual property and online market access.  He can be reached at Stevan@Globalviewstrategies.com.

                                                                               

[1] Farhad Manjoo, Don’t Root for Aereo, the World’s Most Ridiculous Start-up (July 14, 2012) (http://pando.com/2012/07/14/dont-root-for-aereo-the-worlds-most-ridiculous-start-up/).  One commentator likens the scenario to getting around a local ordinance prohibiting public rallies of more than 1,000 people by organizing simultaneous rallies of one person each.  Kevin Roose, Aereo’s Absurd ‘Tiny Antennas’ Strategy Wins in Court (April 2, 2013) (http://nymag.com/daily/intelligencer/2013/04/aereos-tiny-antennas-strategy-wins-in-court.html).
March 6th, 2014 | Category: Intellectual property, Technology | One comment - (Comments are closed)
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